Lloyds TSB has revealed some of the details of its takeover of HBOS today to create a dominant British mortgage and savings bank in a $12.2 billion ($22 billion) deal helped through by the British government.
A change in British competition law ensured the credit crunch did not claim another victim, after HBOS shares were battered in the past week by fears it was struggling to raise funds in wholesale markets.
Lloyds will offer 0.83 of its shares for each HBOS share, valuing them at 232 pence based yesterday's closing prices, or a 58 per cent premium. The deal values HBOS at £12.2 billion, only a quarter of its value a year ago.
By 12.10pm, the agreement had seen HBOS shares jump 44 per cent to 212p while Lloyds shares added 1 per cent to 282.25p, nudging the value of the deal to 234p per HBOS share.
Lloyds said it expects the deal to boost annual earnings by over £1 billion a year by 2011 through cost savings and boost its earnings per share by over 20 per cent a year.
Cost savings could be even higher and the company may be playing down prospects to avoid a backlash about job and branch closures, analysts said.
Lloyds CEO Eric Daniels will remain as chief executive and Victor Blank will stay as chairman. Other positions, including that of HBOS CEO Andy Hornby, have not been decided.
Lloyds investors will own 56 per cent of the enlarged group.
Lloyds' core tier 1 capital ratio - a key measure of financial strength - will fall to 5.9 per cent due to the deal, below the 6 per cent regarded as comfortable.
The UK government said it intends to smooth regulatory approval of the takeover - despite the enlarged group having a 28 per cent share of mortgages - to ensure the stability of the UK financial system. Alistair Darling, UK finance minister, said he fully supported and welcomed the deal.
Lloyds has courted HBOS previously but regulators in the past would not have allowed a bank with such big positions in mortgages, current account and savings.
The credit crunch has changed that. Mr Darling said the government would change legislation to modify competition laws so that the deal can go through.
Bruno Paulson, analyst at Bernstein, said it left "the UK's banking competition policy in tatters".
"A year ago it would have been very difficult for this deal to have gone through, but we live in unusual times," Mr Daniels told reporters on a conference call.
But he denied it was a government-brokered rescue and said the banks have been in talks for several weeks.
"There shouldn't be any impression this is a shotgun marriage or a forced marriage, this is something that's been looked at for a good long while," he said.
Lloyds said the combination will strengthen its ability to serve UK customers in the current difficult markets.
But it will cut the bank's capital cushion and leave it more reliant on wholesale funding, so there are risks, analysts said.
Mr Daniels said he would target a ratio of between 6 and 7 per cent and will pay this year's final dividend in shares, rebase the dividend next year, and consider asset disposals on top of the cost savings to achieve this.